Disney stock currently trades at $86 per share, about 57% below its peak of about $200 before the inflation shock on March 8, 2021. The sell-off was driven by several factors. Disney’s streaming business is experiencing slowing subscriber growth and increasing competition. Its linear TV business has also shown weak performance recently, due to lower advertising and a decline in affiliate revenue in the domestic market. Apart from that, the theme park business has shown solid performance since reopening due to Covid-19, but the near-term outlook is mixed as Disney expects higher costs and normalization of attendance. In the third quarter of fiscal 2024, the park business saw revenue increase just 2% year over year to $8.4 billion, while operating profit declined 3%. While Disney stock traded at a low of around $80 in October 2023, it has recovered slightly after significant volatility.

Looking at a slightly longer time frame, DIS stock has suffered a sharp 55% decline from $180 in early January 2021 to around $85 now, while the S&P 500 has gained about 40% over that roughly 3-year period. Notably, DIS stock has lagged the broader market over the past 3 years. The stock’s returns were -15% in 2021, -44% in 2022, and 4% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 24% in 2023 – suggesting that DIS lagged behind the S&P in 2021, 2022 and 2023. consistently beats the S&P 500 The last few years have been difficult for individual stocks – for better or for worse – including communications services heavyweights like GOOG, META and NFLX and even mega-cap stars TSLA, MSFT and AMZN.

In contrast, the Trefis High Quality Portfolio with a collection of 30 stocks outperformed the S&P 500 every year in the same period. Why is that? As a group, the HQ portfolio stocks delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride as shown by the HQ portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DIS experience a similar situation as in 2021, 2022 and 2023 and perform worse than the S&P in the next 12 months – or will there be a recovery?

Now, the stock could have significant upside potential if it recovers to 2021 levels. A return to pre-inflation shock levels means Disney stock will need to gain about 133% if it recovers from the current $86 to its pre-shock high of about $200 per share. Several factors could drive Disney stock higher. Disney is increasingly focused on increasing the profitability of its streaming business. In the third quarter, Disney’s three flagship streaming services, Disney+, Hulu, and ESPN+, reported operating profit of about $47 million, compared to a loss of $512 million in the same period last year. Disney’s theatrical business is also experiencing a revival, with the blockbuster success of the new animated film Inside Out 2. However, we currently estimate that Disney Rating to around $137 per share, which is about 50% above the current market price. Although Disney stock is undervalued, we believe the company’s upside potential in the near term may be limited by a mixed economy and weaker consumer confidence, which will likely impact the parks business, which has been something of a cash cow in recent years. Disney’s Experiences reporting segment, which includes theme parks and cruise ships, accounted for about 70% of the company’s total operating profit last year. Our detailed analysis of Disney’s upward trend after the inflation shock tracks the performance of the company’s stock during recent turbulent market conditions. It compares these trends to the stock’s performance during the 2008 recession.

Inflation shock 2022

Timeline of the inflation shock so far:

• 2020 – early 2021: An increase in the money supply to cushion the impact of lockdowns led to high demand for goods; manufacturers were unable to meet this demand.
• Early 2021: Supply bottlenecks and labor shortages due to the coronavirus pandemic continue to impact supplies
• April 2021: Inflation rates exceed 4% and rise rapidly
• Early 2022: Energy and food prices rise due to the Russian invasion of Ukraine. The Fed begins its rate hike process
• June 2022: Inflation peaks at 9%, the highest in 40 years. The S&P 500 index falls more than 20% from its peak.
• July – September 2022: The Fed raises interest rates aggressively – leading to an initial recovery in the S&P 500, followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improved market sentiment helps S&P500 recoup some of its losses
• Since August 2023: The Fed has left interest rates unchanged to allay fears of a recession, although rate cuts are expected in 2024.

In contrast, here you can see how DIS shares and the broader market performed during the 2007/2008 crisis.

Timeline of the crisis 2007–2008

• 1.10.2007: Approximate pre-crisis high in the S&P 500 index
• 01.09.2008 – 01.10.2008: Accelerated market decline due to Lehman’s bankruptcy filing (15.09.2008)
• 01.03.2009: Approximate bottoming of the S&P 500 Index
• 31.12.2009: First recovery to the level before the accelerated decline (around 1.9.2008)

Disney and S&P 500 performance during the 2007/08 crisis

The DIS share price fell from almost $29 in October 2007 to $17 in March 2009 (when the markets bottomed out), meaning the stock lost over 40% of its value in the decline. However, by early 2010, the stock had recovered strongly, trading above $32. The S&P 500 Index saw a 51% decline, falling from 1,540 in September 2007 to 757 in March 2009. It then recovered 48% between March 2009 and January 2010, reaching 1,124.

Disney basics of the last few years

Disney’s revenue has increased from around $65 billion in 2020 to around $89 billion in the last 12 months as the company’s theme park business picked up after Covid-19 lockdowns were eased and average spending increased. Higher revenue from its streaming business has also contributed to revenue growth. While the company posted a net loss of around $2.9 billion in 2020 as its theme park operations struggled amid the Covid-19 wave, net profit rose to $2.35 billion in fiscal 2023.

Diploma

The Fed’s efforts to curb runaway inflation are improving market sentiment, and Disney stock has upside potential once concerns about a possible recession are dispelled.

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